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RF unit recovery, new ops for P34 plant seen for Inari Amertron

TheEdge Mon, Apr 15, 2019 - 3 months ago

Inari Amertron Bhd
(April 12, RM1.66)
Upgrade to buy with an upgraded target price (TP) of RM2.
FY19 is expected to be a muted year for Inari, but this is likely to have been priced in by the market with its share price correcting by 35% from the 2018 peak. Looking beyond the current transition phase, we believe investors will start to appreciate the 5G growth potential for Inari, once the technology is progressively being ramped up in new smartphone models.

This should also help to boost Inari’s valuation, which is currently trading at its mean of about 17.5 times its 2020 calendar year (CY20) price-earnings ratio (PER). Upgrade to “buy” with a higher RM2 TP, pegged at 21 times CY20 earnings per share (EPS) or +0.5 standard deviation of its five-year average.

Its share price might still be dampened by near-term quarterly earnings weakness, but this could provide the opportunity for investors to accumulate.

Our target PER for Inari is higher than consensus as we believe its valuation will rerate once Inari’s radio frequency (RF) segment returns to growth trajectory again.

Near-term rerating catalysts for Inari include the recovery in the RF segment (tracking Broadcom guidance) and securing new businesses for its new P34 plant in Batu Kawan. We believe this should progressively take place towards the end of the second half of CY19 (2HCY19).

Our RM2 TP is based on 21 times CY20 EPS, which is at a premium relative to the Malaysian technology sector’s average given Inari’s strong earnings growth.

There is significant slowdown in demand for smartphones. This could affect sales for the RF segment. However, the impact may not be as severe because of the rising RF content in smartphones. — AllianceDBS Research, April 12

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